GP Interest in EM VC, in Addition to a Developed Markets VC Portfolio

2 September 2015

Pat Burtis, Partner
Amadeus Capital Partners
San Francisco

The rise of the “digital middle class” in developing economies is one of the most significant growth stories in the technology industry today, and will remain so for at least the next decade. Since 1997, we have invested in start-ups across the United Kingdom, Europe, Israel and the United States, but we wanted to participate in this next wave of global technology adoption and innovation. In 2013, we launched a fund anchored by a major commitment from MTN, Africa’s largest mobile network operator. The fund is global in scope (excluding China and Russia) and targets mid- to late-stage technology companies in the mobile, online services and digital media spaces. To date, the fund has invested in four companies, serving Latin America, Africa, India and Eastern Europe.

Our interest is driven by three concurrent transitions which are creating massive opportunities for entrepreneurs and their investors: the rise of a middle class in emerging markets; the proliferation of broadband and mobile internet in these markets; and the “cloudification” of IT, which means you can start a company anywhere in the world, with best-of-breed technology, at a relatively low cost.

For technology VCs, emerging markets present unique opportunities and challenges.

On the positive side, the rapid adoption of technology by consumers creates secular growth patterns largely untethered by macroeconomic constraints. For instance, e-commerce in Brazil has boomed in recent years, while the macro economy has stagnated.

Emerging markets also tend to harbor large traditional industries which demonstrate extant market demand, but lag in technology innovation. This can be an advantage for tech start-ups seeking to build a business, as legacy markets can yield earlier revenue traction than de novo markets. Bidu.com.br is pioneering the sale of online consumer insurance in Brazil, while accessing an existing US$1.5 billion to US$2 billion commission pool. Cambridge Clean Energy, which provides energy solutions for cellular base stations in India and Africa, is leveraging an already large market for diesel and grid electricity.

For tech start-ups, emerging markets also tend to be less competitive than the United States or Europe. The opportunity for “winner-take-all” scenarios are greater due to less competition and a more focused concentration of risk capital in these markets. Lastly, valuations tend to be significantly lower in emerging markets than for comparable opportunities in the OECD.

On the other hand, there are specific risks to EM tech investing. Perhaps most importantly, experienced entrepreneurs are rare in these markets – just as they were in Europe 15 or 20 years ago. Follow-on capital is scarcer in these markets. Liquidity paths for private technology companies remain unproven (though several recent IPOs and acquisitions suggest this may be changing). Lastly, and not to be underestimated, tech investors are not immune to the classic perils of EM investing: country, political, currency and governance risks, to name a few.

Though very mindful of the risks, we are increasingly excited about the opportunities in our target geographies and sectors, driven by the underlying fundamentals: large intrinsic markets; rapid adoption of new technologies; and an inspiring cohort of talented and ambitious entrepreneurs intent on changing their worlds for the better, while creating significant financial value for themselves and their investors.

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